BSBY Swaps & Futures Volume
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Lastest BSBY News
FSOC (Financial Stability Oversight Council) Annual Report￼
FSOC | 12/16/2022
In the Financial Market Structure review in FSOC’s annual report, Credit-sensitive alternatives to SOFR, have seen little relative adoption by market participants. Although the Council has continued to advise lenders, borrowers, and other market participants to consider SOFR-based rates and to conduct a comprehensive evaluation before adopting any alternative rate, warning that rates based on small transaction volumes, could introduce risks. While banks will not be criticized for choosing a different rate, a number of Council members have emphasized concerns with such credit-sensitive rates being referenced in capital or derivatives markets.
BW Take: The real question is if a RFR in arrears based almost solely on overnight transaction volume and term SOFR derivative restrictions provide market participants with less systemic risk than a CSR with a legitimate term structure calculated against a broad set of transaction volume. As market participants gain the ability to evaluate these risks, the need for alternative rates for certain transactions seem obvious.
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As SOFR Deadline Looms, FCA Proposes Extensions for ‘Synthetic’ Approach to Legacy USD LIBOR Contracts
Ballard Spahr LLC | 12/5/2022
The UK Financial Conduct Authority (FCA) on November 23 published its Consultation on ‘Synthetic’ U.S. Dollar LIBOR to advance some synthetic applications of USD LIBOR from June 30, 2023, until September 30, 2024. If the Consultation is adopted, here are some issues to consider when determining whether outstanding “tough legacy” USD LIBOR contracts will convert to the Secured Overnight Financing Rate (SOFR) or a synthetic USD LIBOR rate.
BW Take: A very good synopsis of the FCA Consultation on ‘synthetic’ US dollar LIBOR and feedback to CP22/11 by Ballard Spahr While Libor for contracts referencing US law will convert to SOFR on 30Jun2023, there are significant contracts referencing UK and other non-US law that will not transition via the US Adjustable Rate Libor Act. For these contracts, the FCA are proposing that a synthetic derivation of Libor based on Term SOFR plus appropriate spread adjustments.
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Three Critical Problems AXI Solves for Banks
Marcus Burnett | 12/1/2022
The article discusses three three of the critical challenges facing banks as they replace Libor with a risk free rate.
BW Take: Provisioning credit is among the chief functions of banking and speaks to the fundamental way financial instruments are created, funds are invested, demand is accommodated and risk is managed. Perhaps one day, we’ll look back at this period in history and understand how the move from Libor to a risk free rate did not seemingly acknowledge these basic principles with a more logical approach. As we see with alternative reference rates like BSBY, Marcus Burnett, in highlighting these inefficiencies, discusses the Invesco USD-AXI credit spread index supplement as one solution to an obvious set of challenges.
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Term SOFR and Term SONIA: A Return to Term Reference Rates in European Fund Financing Transactions?
Mayer Brown | 11/30/2022
Now that the dust has (almost!) settled on issues relating to LIBOR cessation in fund financing transactions (and the lending markets more generally), we are increasingly seeing market participants turning their attention to the rates now being used for financing transactions involving currencies which were previously funded on the basis of LIBOR.
BW Take: The realization that “recommendations” of the £RFR Working Group do not provide a regulatory impediment to European market participants seeking to finance US dollar transactions on the basis of Term SOFR, has put a degree of focus on potential use cases where a Term SONIA rate may be appropriate. Could CSRs be next to follow?
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Keynote of Chairman Rostin Behnam at Bloomberg’s The Final Chapter for USD LIBOR
CFTC Chairman – Rostin Behnam | 11/17/2022
Chairman Behnam provides a detailed overview on the Libor transition, the efforts that have gotten us to this point and the challenges ahead as we approach the drop-dead cessation date of June 30, 2023.
BW Take: In contrasting O/N & Term SOFR, Behnam acknowledges the challenges of the two disparate rates but makes no mention of the growing basis risks facing banks. “Use of Term SOFR rates in derivatives and most other cash markets must be limited to avoid the types of problems created by LIBOR. Most recently, a rather large securitization that referenced Term SOFR drew concern. If this practice were to begin trending, it would increase the use of Term SOFR derivatives, which could lead to a decline in the overnight SOFR derivatives markets on which Term SOFR is based. This outcome would be the antithesis of what the official sector and market participants have worked so hard to achieve” As banks struggle to manage mounting basis risk and borrowers begin to resist Term SOFR Liquidity Spreads AND Credit Spread Adjustments, BSBY is beginning to gain legitimate momentum.
No Way CSA
Ropes & Gray LLP | 9/22/2022
Recent changes in LIBOR and SOFR levels have upended a multi-year conversation between borrowers and lenders about what credit spread adjustment, if any, is appropriate to be added to SOFR-based interest rates when credits switch from LIBOR to SOFR. LIBOR and SOFR are fundamentally different reference rates because LIBOR is a credit-sensitive rate, which includes the cost of funds to banks, and SOFR is a risk-free rate tied to the cost of borrowing against treasuries.
BW Take: Its difficult to deny how the optionality and variability of a credit spread adjustment (CSA) introduces systemic risk and how rising rates are contributing to the pressure on lenders to reduce or remove CSAs completely. The core principles rooted in the origin of Libor aligned market exposures with the variable funding costs of the lender and not against some arbitrary fixed-rate estimate in the form of a CSA. Adopting a credit sensitive rate backed by material and relevant transaction data would seemingly benefit both lenders and borrowers.
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*Data limited to syndicated loans, as bilateral loan activity is less readily available as of 30-May-2023
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